European DVD Biz Facing Hurdles

Last year was a tough one for the European DVD business. The issues facing the region varied from the specter of an economic slowdown to piracy, price deflation and intense competition from other forms of entertainment, including a resurgent games industry.

Two people charged with maintaining a healthy DVD business are Matt Brown, EVP international, Sony Pictures Home Entertainment, and Eddie Cunningham, president of Universal Pictures International Entertainment.

For Cunningham, a major target for improvement over the next year is physical distribution and fulfilment. “One of the key points is the supply chain — it needs to be closer to its optimum than it is today,” he said.

Cunningham can be forgiven for having the supply chain uppermost in his mind — Universal's replicator system went into meltdown in late 2007, causing the studio a major headache. That local difficulty aside, he is more concerned that the industry through its boom years did not concentrate on improving its systems.

“I think as an industry we have to sit down and think about what we can do better,” he said.

Brown agrees, suggesting that the developments seen in the United States on logistics and merchandising will filter around the world.

“We are going to invest much more in merchandising and in-store,” he said. “It is unacceptable to be out of stock at any point — you cannot sell a movie unless it is on the shelf. Consumers need to have a good experience when they are in-store.

Brown also highlights the need to work more closely with retailers to understand the demographics of individual stores, even in those towns with multiple outlets.

“We need to be better at figuring out with retail what is selling in each of those stores,” he said. “It is no longer about sending a bunch of stuff out and seeing if it sticks. We have a tremendous business — a multibillion-dollar business around the world — but there is no question that we have to constantly improve and get better at how we service the consumer through our customers.”

On a European level, both are highly positive about regions such as the Benelux, Scandinavia, the United Kingdom and Germany but express some concerns about France, Spain and Italy.

“Over the past couple of years, a number of the European markets have matured, and we've had some decline,” Cunningham said. “It feels to me that last year, the majority of markets showed some growth, the main reason being that there was some great content around. Good stuff sells.”

The big exception was France, he said, where the economic climate and political unrest made a lot of consumers uneasy about their financial position.

“It seems that there was a broad retail issue, and it affected video sales,” he said. “We think the market in France fell about 11% in value last year, and it had a disastrous Q4.”

High Hopes for High-Def

Brown hopes high-definition will lift the French market. “We've seen good growth out of Blu-ray this year,” he said. “The French love entertainment product and are embracing high-definition.”

Cunningham believes high-def will make “a bit of an impact” over the next year, but Brown expects more.

“I'm thrilled that it has happened,” he said of the Warner move to Blu-ray. “It means that we are going to go out and get the consumers excited about the new format.”

He, like Cunningham, does not believe it will roll out as dramatically as the conversion from VHS to DVD.

“That was a dramatic leap from analog to digital,” he said. “But I do think people will find high-definition product to be compelling, and the roll out will be steady. Our job is to figure how fast we can make it happen.”

Brown admits that the emergence of improved standard-definition DVD players — the upscalers — are a potential distraction at consumer level but argues that the industry has to combat it with more in-store demonstrations.

“As you get used to watching things in HD, it is hard not to want it all the time,” he said. “I still believe the best way to sell Blu-ray — and 1080p TV screens — is to show people the content.”

An aggressive campaign in support of PlayStation 3 and Blu-ray in Spain has helped a market that is characterized by both execs as hard.

“The difficult markets in Europe, apart from France, which I think is a blip, by the way, are Spain and Italy,” Cunningham said. “I think the reason for that is that they have been heavily rental-based territories, and that business just gets tougher and tougher.”

More BroadbandCould Boost Piracy

Fuelled by broadband Internet, piracy is also a major issue in Spain and Italy, Brown said.

“Piracy has affected us worse in Spain than pretty much any other country in Western Europe,” he said. “It really has been one of those countries where it has grabbed hold in spite of MPA efforts and in spite of all the studios' individual efforts. We are looking to Blu-ray to help offset some of that.”

And he warns that the roll out of broadband around the world could see similar damage done elsewhere.

“We have seen it in places such as Korea where they have almost 100% high-speed Internet penetration,” Brown said. “Youth has been online playing games and interacting on the Internet for years, and we have certainly seen a rapid and big decline in video retail and rental in the past few years.”

It is really important, he adds, that the content providers “continue to tell the consumer we have the real thing.”

“To me, it is about having a quality entertainment experience,” Brown added.

Interestingly, both men note that high-speed Internet in Scandinavia has not resulted in obvious damage to the packaged-media business.

“There is tremendous high-speed Internet up there, but yet there is not, we feel, as much piracy,” Brown said. “Maybe it is the government enforcement, maybe it is the culture, but we've found our growth up there has been phenomenal, particularly in catalog, particularly in quality special editions. They want the package, and they want the good stuff.”

It helps that there is quite a low physical piracy problem, adds Cunningham. “Most of the piracy is Internet-based, which contrasts with the U.K., say, where it is mostly physical. The absence of the physical piracy helps the packaged-media business in the Nordics — if you like the disc, you don't have as many alternatives there. I think it has to do with the geography of the country, distribution is incredibly expensive there.”

Italy also is plagued by piracy, but Brown notes a growing retail base as a good sign for the future.

“Local and pan-European retailers are growing in Italy,” he said. “The market has always tended to be focused in the north, but that is now spreading south of Rome. Italians seem to be buying more product, and there's always been a pretty good rental market there. While there are many similarities, unlike Spain, I think Italy still has some growth in it.”

Similarly, Cunningham believes that the Benelux is a market with more growth to come, particularly from catalog sales. Brown, however, notes that the price deflation that had afflicted Belgium has hopped across the border to the Netherlands, where the low-priced DVD has prospered.

The Value of Packaged Media

Price deflation, of course, has been a major issue in the United Kingdom, where Cunningham believes there are signs that attitudes at the retail level are changing.

“We've been quite encouraged that retail pricing has held up better compared to previous years,” he said. “It looks like a number of retailers are pricing the product at a level that the consumer is prepared to pay for, rather than in that loss-leading way they have done for a while.”

It may be, he said, that at last the U.K. business is beginning to accept the findings of some research on consumer attitudes toward price.

“The lesson from the research that is clear to me is the consumer is very often prepared to pay more than the retail pricing,” Cunningham said. “And it is clearly true to say that retailers cannot continue to sell at a 50% loss and sustain it. The majority of the issues we have in the U.K. market are about retailers loss leading or selling at almost no margin.”

Brown stresses that studios cannot affect retail competition but does suggest that they can focus on getting across a message that gets “the consumer to recognize the value when they buy one of our films.”

Value, or price, is also something of a defining characteristic of the German market, according to Cunningham. “It is an amazing country for the catalog business,” he said. “The Germans really seem to like a deal. But I think all the studios wrestle with the fact that we don't sell enough at new release given the size of the population and the general interest in DVD.”

Noting that price erosion on catalog means this growth has not really added to revenue, Brown adds that it is important to remember that cultural differences are at play here.

“Because it is a Northern European advanced economy, we all assume it is going to behave like the U.K., or Australia or the U.S.,” he said. “But Germans are very specific about what they do with their spare time — much of it is spent outdoors — so we have to continue to convince them that we have a great value proposition.”

According to Brown, it is not just in Germany that the studios have to convince consumers that their movies are worth watching. Across the world, movie distributors have to compete with a huge array of other entertainment products used in particular by the younger generation. That means reshaping their content to suit the desire for moreflexible consumption, he adds.

“All the research says that the generation coming up wants choice, interactivity with the content, and they want portability,” Brown said. “We're looking at second session or Copy Plus because that is what consumers are telling us that they want, and we will provide it.”

There is no doubt in Cunningham's mind that digital delivery is coming, and fast, but he does not believe that it necessarily spells the end of the packaged-media business.

“Is it going to stop people buying DVDs in huge quantities over the next five to 10 years? I don't think so,” he said. “History shows that every time we give consumers a really creative way to consume the product, not only does the overall pie grow but all the component parts grow as well.”

What is going to change, Cunningham said, is the way content owners will have to market their products because mass audience television is no longer an option.

“We are working very hard on online at the moment to engage people there,” he said. “What we have to recognize as an industry is the way we reach consumers is fragmenting rapidly and that it changes every year.”

Brown agrees and suggests that the studios have also to keep in sight the overall promotion of movies as a value entertainment option.

“We have taken for granted over the years that, of course, people are going to buy and watch movies, and we need to promote that more than ever because the competition for leisure time is greater than ever,” he said.